Rise and Fall of the First Global Real Estate Bubble

The rise and fall of the first global real estate bubble
GONZALO BERNARDOS

The key factor to create the first real estate bubble was the existence of great liquidity at global scale between 2001 and 2005. In some countries, this period lasted till August 2007. Liquidity was generated by historically very low interest rates and virtually unbeatable financing conditions. Between 2006 and 2008, the different real estate bubbles burst. This was the consequence of the combination of two phenomena: a sudden change in mortgage financing conditions due to worldwide expansion of the US subprime mortgage crisis, and a large excess offer in housing in some countries.

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Change of cycle or change of model?

IntroductionThe evolution of the residential market has historically been a secondary subject, only followed basically by real estate professionals and those thinking of buying or selling a housing property in the near future. International investment was scarce and there were virtually no indices comparing housing price increases in different countries. However, the economic situation in the residential market has become a subject of great macroeconomic relevance after 2000. The rise of the first global real estate bubble between 2001 and 2005 was to blame for it. After 2006, the reason was its burst, first in the United States, then in Spain, Ireland and the United Kingdom, before eventually reaching Eastern Europe. In many countries, investment in building has evolved from a key driver of economic growth to a mere relict within a few years. The creation of the first real estate bubble was mainly driven by great liquidity at global scale between 2001 and 2005. In some countries, this period lasted till August 2007. This liquidity was generated by historically very low interest rates and virtually unbeatable financing conditions offered by banks to families and companies. This liquidity created unheard phenomena such as the simultaneous rise of riskier assets (stock and housing) as well as those traditionally considered a haven (bonds and gold). So in 2005, the world economy featured a really paradoxical combination: considerable increase of stock quotations (except in the US), strong rise of housing prices, high market value of government bonds of developed countries and gold price at its maximum level of the previous twenty years. That year, almost all assets increased their value or maintained it at an extraordinarily high level. Between 2006 and 2008, the different real estate bubbles created in the previous period burst. This was caused by the combination of two phenomena: a sudden change in mortgage financing conditions, and considerable excess housing offer in some countries. Worldwide expansion of the US

In some countries such as Spain, the United Kingdom and Ireland, the bubble would have burst even without the financial crisis in the United States. After August 2007, lower credit availability reduced considerably demand in housing, which was already in clear decline, leading to considerable agreements on prices and transactions in a large number of countries. Nevertheless, in some countries such as Spain, the United Kingdom and Ireland, the bubble would have burst even without the financial crisis in the United States. The main reason was considerable excess in offer, a point that was clearly visible in early 2007. If the subprime mortgage crisis had not occurred, the bubble would probably have taken longer to burst and its negative effects would have been less intense and more spread over time. I will divide the present article into three sections. In the first, I will analyse the main reasons that led to a global real estate bubble between 2001 and 2005. In the second, I will explain how the bubble burst and some features this burst has had in some countries. Finally, in the third...

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